When management presents financial statements, it is implicitly claiming things about every number and disclosure in them: that the receivables exist, that all liabilities are included, that revenue belongs in this period. These implicit claims are financial statement assertions, also called management assertions or audit assertions. The auditor uses them to think about what could go wrong and to design procedures that address it.
In a US nonissuer audit, assertions are defined and used in AU-C 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, as revised by SAS No. 145. This guide explains the assertions, how SAS 145 organizes them, and which procedures address each one. It paraphrases the standard; see AU-C 315.
Why assertions matter
Risks of material misstatement are assessed at two levels: the financial statement level and the assertion level. At the assertion level, the auditor asks, for each significant class of transactions, account balance or disclosure, which assertions could be materially misstated and how likely that is. The answer drives the nature, timing and extent of further audit procedures under AU-C 330.
A procedure that does not address a specific assertion is hard to justify. A procedure aimed at the wrong assertion wastes time and leaves the real risk untested. Confirming receivables gives good evidence about existence, for example, but little about valuation or completeness.
How SAS 145 organizes the assertions
Older US audit literature grouped assertions into three categories: classes of transactions, account balances, and presentation and disclosure. SAS 145 consolidated them into two categories, with presentation and the related disclosures included in each:
- Assertions about classes of transactions and events, and related disclosures, for the period under audit.
- Assertions about account balances, and related disclosures, at the period end.
The auditor may express the assertions differently, or combine them, as long as all the aspects are covered. A firm methodology may use a shorter list, such as combining accuracy and valuation, as long as every aspect is covered.
Assertions about classes of transactions and events
These apply to income statement activity and other flows during the period, such as revenue, purchases, payroll and cash disbursements.
| Assertion | What it means | Example of what could go wrong |
|---|---|---|
| Occurrence | Recorded transactions and events occurred and relate to the entity | Fictitious sales recorded to meet a target |
| Completeness | All transactions and events that should have been recorded have been recorded, and all related disclosures are included | Vendor invoices received but not entered |
| Accuracy | Amounts and other data have been recorded appropriately, and related disclosures are appropriately measured and described | Invoice priced at the wrong rate |
| Cutoff | Transactions and events are recorded in the correct period | December shipment recorded in January |
| Classification | Transactions and events are recorded in the proper accounts | Capital expenditure recorded as repairs |
| Presentation | Transactions and events are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable under the framework | Revenue disaggregation disclosure omits a material category |
Assertions about account balances
These apply to balance sheet items at the period end, such as cash, receivables, inventory, payables and debt.
| Assertion | What it means | Example of what could go wrong |
|---|---|---|
| Existence | Assets, liabilities and equity interests exist | Receivable from a customer that does not exist |
| Rights and obligations | The entity holds or controls the rights to assets, and liabilities are obligations of the entity | Consigned inventory held for others counted as owned |
| Completeness | All assets, liabilities and equity interests that should have been recorded have been recorded, and related disclosures are included | Unrecorded liabilities at year-end |
| Accuracy, valuation and allocation | Balances are included at appropriate amounts, any valuation or allocation adjustments are appropriately recorded, and related disclosures are appropriately measured and described | Obsolete inventory not written down |
| Classification | Assets, liabilities and equity interests are recorded in the proper accounts | Long-term debt due within a year shown as noncurrent |
| Presentation | Balances are appropriately aggregated or disaggregated and clearly described, and related disclosures are relevant and understandable | Debt covenant terms not disclosed |
Direction of testing
Two assertions point in opposite directions and are worth keeping straight.
- Existence and occurrence concern overstatement. Test by starting from the recorded item and going to the evidence (vouching).
- Completeness concerns understatement. Test by starting from evidence outside the records and going to the books (tracing).
A sample selected from the recorded receivables listing cannot find a receivable that was never recorded. That is why the starting population matters as much as the procedure.
Relevant assertions and significant accounts
SAS 145 defines two related terms:
- A relevant assertion is an assertion about a class of transactions, account balance or disclosure for which there is an identified risk of material misstatement. Whether an assertion is relevant is decided before considering controls, based on inherent risk: there must be a reasonable possibility of a misstatement that is material.
- A significant class of transactions, account balance or disclosure is one for which there are one or more relevant assertions.
This framing means the auditor does not test every assertion for every account. A prepaid expense balance might have no relevant assertions at all if it is small and simple. Revenue might have relevant assertions for occurrence, cutoff and accuracy but not classification. The audit risk model post covers how inherent risk is assessed for each.
Two safeguards apply to material items. AU-C 330, as amended by SAS 145, requires substantive procedures for each relevant assertion of each significant class of transactions, account balance and disclosure, regardless of the assessed control risk. And the AU-C 315 stand-back requires the auditor to revisit any quantitatively or qualitatively material class, balance or disclosure for which no relevant assertion was identified and conclude whether that is still appropriate. So "no relevant assertions" for a material balance needs a documented reason. A firm may also choose to perform some substantive work, such as analytics, on every material balance.
Mapping assertions to procedures
Cash
| Assertion | Typical procedure |
|---|---|
| Existence | Confirm bank balances; inspect bank statements |
| Completeness | Review bank reconciliations; search for unrecorded accounts through confirmations and inquiry |
| Rights and obligations | Confirm restrictions and compensating balances |
| Cutoff | Test transfers between accounts around year-end |
| Presentation | Evaluate disclosure of restricted cash |
Accounts receivable and revenue
| Assertion | Typical procedure |
|---|---|
| Existence / occurrence | Confirm balances with customers; vouch recorded sales to shipping documents and contracts |
| Completeness | Trace shipping documents to invoices and the sales journal |
| Cutoff | Test sales and shipments for several days before and after year-end |
| Accuracy | Recalculate invoices; agree prices to contracts |
| Valuation | Test the aging and the allowance for credit losses; review subsequent cash receipts |
| Presentation | Evaluate revenue disaggregation and contract balance disclosures |
Inventory
| Assertion | Typical procedure |
|---|---|
| Existence | Observe the physical count; perform test counts from the listing to the floor |
| Completeness | Perform test counts from the floor to the listing; test receiving cutoff |
| Rights and obligations | Inquire about and test consigned goods and goods held for others |
| Valuation | Test costing; review slow-moving and obsolete items; compare cost to net realizable value |
Accounts payable and accrued liabilities
| Assertion | Typical procedure |
|---|---|
| Completeness | Search for unrecorded liabilities: review disbursements after year-end and unpaid invoices |
| Existence | Vouch recorded payables to invoices and receiving reports |
| Cutoff | Test receiving reports around year-end |
| Accuracy / valuation | Recalculate accruals; agree to supporting documents |
Debt
| Assertion | Typical procedure |
|---|---|
| Completeness | Confirm with lenders; review minutes and interest expense for unrecorded borrowings |
| Rights and obligations | Read loan agreements |
| Valuation | Recalculate interest and amortization of issuance costs |
| Classification | Evaluate current vs noncurrent split, including covenant breaches |
| Presentation | Evaluate maturity and covenant disclosures |
Assertions in sampling, materiality and misstatements
- Sampling. When sampling under AU-C 530, define the population with the assertion in mind. The test of completeness needs a population that could contain the unrecorded item.
- Materiality. Performance materiality from AU-C 320 sets the threshold for designing the test.
- Misstatements. Each misstatement found should be recorded with the assertion it affects on the summary of misstatements under AU-C 450. That helps evaluate whether misstatements in one assertion indicate a broader problem.
Documenting assertions
Under AU-C 230, the file should let a reviewer see the link from risk to procedure. For each significant account, document:
- The relevant assertions and the assessed risk of material misstatement for each.
- The planned response, listing the procedures and the assertion each addresses.
- On each workpaper, the objective stated in terms of the assertion, for example "completeness of accounts payable at 12/31."
- The conclusion on the assertion.
A workpaper whose objective is just "test accounts payable" does not show which risk it addresses. Naming the assertion forces the procedure to fit the risk.
FAQ
What are the five main audit assertions?
Many textbooks list existence or occurrence, completeness, rights and obligations, valuation or allocation, and presentation and disclosure. AU-C 315 as revised by SAS 145 uses a more detailed list in two categories: one for classes of transactions and one for account balances, each with presentation included.
What is the difference between existence and occurrence?
Existence applies to balances at a date, such as receivables at year-end. Occurrence applies to transactions during the period, such as sales recorded during the year.
What is a relevant assertion?
A relevant assertion is one for which there is an identified risk of material misstatement, determined based on inherent risk before considering controls. Accounts with at least one relevant assertion are significant.
Which assertion does a search for unrecorded liabilities test?
Completeness of accounts payable and accrued liabilities. The test starts from evidence outside the recorded payables, such as disbursements after year-end, and looks for items that should have been recorded.
Do I need to test every assertion for every account?
No. Further procedures focus on relevant assertions, and AU-C 330 requires substantive procedures for each relevant assertion of each significant class of transactions, account balance and disclosure. A material item with no relevant assertion still goes through the AU-C 315 stand-back evaluation, and a firm may choose to perform some substantive work on it anyway.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- AICPA, AU-C Section 315, Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement, as revised by SAS No. 145 (assertions, relevant assertions, significant classes of transactions, account balances and disclosures, stand-back evaluation)
- AICPA, AU-C Section 330, Performing Audit Procedures in Response to Assessed Risks and Evaluating the Audit Evidence Obtained, as amended by SAS No. 145
- AICPA, AU-C Section 230, 320, 450 and 530
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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error